Currently the world produces and consumes about 85 million
barrels of oil a day. The recent worldwide economic downturn
has affected this demand, and supply is contracting accordingly
to accommodate this decline. However, prior to this, world demand
for energy has been increasing steadily at a rate averaging
about 2% per year. The world wide recession will end at some
point, and then economic growth will again rely on energy and
the availability of it. Even without economic growth, we still
have human population growth which is increasing conservatively
at a rate of 1.4% per year. This will alone have an effect on
demand. To put this into context, if we just resume our rate
of energy demand, growth prior to the downturn the world oil
consumption alone will be over 130 barrels a day by 2030, and
our need for natural gas and electricity will jump by 50%! This
will still leave 50% of the world's population with little
to no energy supply.
Depending on whose numbers you use, the world passed
the peak of oil discovery between 1962 and 1964. We now find
only one barrel of oil for every 3 we produce, and this ratio
is only getting worse. The fields we are now discovering are
progressively smaller and in more remote and geographically
challenging locations. Seventy percent of our daily oil supply
comes from oil fields that were discovered prior to 1970. The
U.S. reserves have been in decline since 1972, thereby increasing
crude oil imports by an average of more than 4.7% annually since
1985.
The current administration has pledged its commitment
to weaning our country off the reliance on foreign energy sources.
While they may be overly optimistic with their projections on
the timing of such a transition, it is evident that more reliance
on domestic oil and especially natural gas will come about as
a result of their initiatives and leadership. No matter what
strategy is eventually used, this will put a premium on domestic
oil and natural gas.
Most professional economists and financial analysts
agree that a result of the massive government spending currently
going on will be some level of inflation in the near future.
Many believe it could be severe inflation, possibly hyper inflation.
Investors of all ages are affected by inflation because of the
way it diminishes one buying power, but no one is more hurt
by it than seniors. Investors can combat this best by owning
hard assets. Domestic oil and gas royalties are two assets that
history shows are outstanding assets to own in inflationary
environments.
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